Greenwoods Asset Management’s decisive move into China’s A-shares market last year accounted for half of the 30% gain racked up by the Shanghai-based firm’s flagship US$1.4 billion long/short fund in 2014, said Joseph Zeng, a Greenwoods partner and head of the firm’s Hong Kong office.
On the back of an explosive A-shares market rally in November and December, that move — from late 2013, after valuations had plunged to as much as half those of China’s Hong Kong-listed H-shares — lifted the Golden China Fund’s net long exposure to companies traded on the mainland to 51%, from 8% two years before, Mr. Zeng said.
That shift is just the latest example of a value investment discipline — exercised across a complex, alphabet soup of China stock market listings — that helped transform Greenwoods from a one-man operation 15 years ago to an institutional quality money manager with US$5 billion in assets under management, Mr. Zeng said.
The man in question, Greenwoods founder and CEO George Jiang, started investing for friends and family in 2000, fresh from more than a year studying investments and real assets at a non-degree program at the University of California at Los Angeles.
Before UCLA, the 48-year-old Mr. Jiang completed three years of study at a graduate school run by China’s central bank, worked four years as a regulator on the Shenzhen stock exchange and two years managing A-shares portfolios as head of asset management with Guosen Securities Co., a leading Chinese brokerage firm based in Shenzhen, Mr. Zeng said.
As he moved to put the fundamental investment tenets he learned at UCLA to work, Mr. Jiang’s decision to avoid a buoyant, overvalued A-shares market in favor of B-shares — listed in Shanghai and Shenzhen but open only to foreign investors and traded in U.S. and Hong Kong dollars — and H-shares quickly paid off when China’s regulators decided in early 2001 to let domestic investors buy B-shares as well, sparking a strong rally, Mr. Zeng said.
Mr. Jiang made further gains piling into Hong Kong-listed H-shares in early 2003, when the outbreak of the deadly SARS virus prompted a brief but steep selloff. Helped by the market’s recovery near the end of that year, Mr. Jiang found he had racked up a 700% gain over the three years through 2003, Mr. Zeng said.
The following year, Mr. Jiang launched Greenwoods — and its Golden China long/short fund — to manage money for third-party investors.
A decade later, Greenwoods has roughly $5 billion in assets under management, with two-thirds coming from offshore institutional investors and one-third from investors in China.
The firm counts a number of heavyweight institutional investors among its clients, said Mr. Zeng, who declined to name them. The US$893 billion Norges Bank Investment Management, Oslo, and the C$219 billion (US$175 billion) Canada Public Pension Investment Board, Toronto, list Greenwoods among their external managers. Spokesmen at Norges and CPPIB declined to provide further details.
Analysts note that China’s retail-dominated, momentum-driven market has not been the perfect petri dish for spawning institutional-quality managers. A relatively small number of Chinese-based managers has managed to attract offshore institutional investment, even as most continue to lag their Hong Kong-based peers in terms of institutional best practices, said Richard Johnston, Hong Kong-based managing director of alternatives investment consultant Albourne Partners (Asia) Ltd.
Still, with offshore asset owners likely to boost allocations to the mainland going forward, the potential is there for “people who build the right business (to) do very well,” Mr. Johnston predicted.
Mr. Zeng contends that Greenwoods is the real deal. With its 20 analysts, many of them industry veterans of the sectors they cover, and its focus on fundamental research, “our strength is stock picking — based on due diligence and local insights, not momentum trading,” he said.
The firm, with its extensive operations, risk management and compliance team, “has been very institutionalized and professional,” he said.
Some industry observers agree. “These guys (at Greenwoods) are not only smart and good (at what they do), but they’ve institutionalized,” said Peter Alexander, managing director of Z-Ben Advisors, a Shanghai-based consulting firm on financial industry business opportunities in China. In terms of compliance, they might not be where top global hedge funds are but “they’re not cutting corners. It’s just a different way of doing things,” Mr. Alexander said.
Others, while conceding Greenwoods’ investment returns are attractive, say the firm doesn’t readily provide the flow of information they require as part of a typical relationship with a manager.
Mr. Zeng concedes Greenwoods doesn’t do “active marketing.” “We’re not crazy about marketing; we’re crazy about performance,” he said, adding “performance is the best marketing.”
Some analysts, meanwhile, point to the heavy beta exposure of Greenwood’s long/short funds as a counterargument to the view that stock picking is powering the firm’s returns.
At the end of 2014, the Golden China Fund’s hefty long position in A-shares left the fund with a “long bias” of 83%, well above the 20% to 70% range it had maintained for the prior three years, Mr. Zeng said. He said that simply reflected the fact that Greenwood’s investment team was finding more opportunities to go long than to go short in China’s market.
Mr. Zeng said stock picking remains Greenwood’s strength at a time when China’s economy is undergoing a slowdown, prompting offshore investors in particular to avoid the market or even short Chinese stocks.
He said his firm believes it can take advantage of a “lousy macro, rosy micro” environment, identifying companies that can deliver “defensive growth” — such as Beijing-based hydroelectric power company SDIC Power Holdings Co. Ltd.
With the Chinese government’s push to promote clean energy amid the country’s devastating pollution problems, a company such as SDIC can thrive even if China’s economy continues to come off the boil as expected, Mr. Zeng said.
SDIC was added in June to the China Alpha Fund that Greenwoods launched in 2010 as a high conviction, “best ideas” long/short fund with fewer restrictions on concentration and liquidity, Mr. Zeng said. With the stock price doubling over the last half of 2014, SDIC accounted for roughly 15% of the fund at the end of the year, he said.
Since 2012, investors in that fund, which ended 2014 with AUM of roughly US$600 million, have been able to choose between two options: a long/short fund invested in only publicly listed equities and a fund with a “private equity side pocket,” that can amount to up to 50% of the fund’s assets.
With private equity deals being done in China recently at high valuations, Greenwood’s value discipline has left the China Alpha Fund with only minor side pocket allocations. Even so, “we want to have this capability,” Mr. Zeng said.